A payroll deduction is money taken from an employee’s paycheck to pay for taxes, benefits, or other fees.
There are three main types of payroll deductions:
- Pre-tax deductions and contributions
- Local, state, and federal taxes
- Post-tax deductions and contributions
Here’s a quick breakdown of the different types of payroll deductions and how they work:
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1. Pre-tax deductions
A pre-tax deduction is money that is taken out of your employee’s gross pay before any taxes are withheld from their paycheck.
Not all pre-tax deductions are the same. Some deductions are considered pre-tax for all taxes, while others may still require certain taxes to be withheld.
Common pre-tax deductions/contributions include:
- Retirement funds. Contributions to some retirement funds like a traditional 401(k) can be a pre-tax deduction.
- Health insurance. Health benefits, like health insurance or FSA or HSA plans, may allow pre-tax deductions. If your employee pays for health insurance through a health plan offered at your company, then those contributions could be pre-tax.
- Commuter benefits. Some commuter benefits are eligible to be pre-tax deductions, within certain limitations.
2. Employee withholding taxes
Federal, state, and some local taxes are withheld from an employee’s pay on each paycheck. These can include:
- Federal income tax
- State income tax (in states with income tax)
- Any applicable local taxes at the city, county, or municipality level
- Employee’s share of FICA (Medicare and Social Security taxes)
- State disability insurance (SDI) if your state assesses that tax
3. Post-tax deductions
A post-tax deduction is money that is taken out of your employee’s paycheck after all applicable taxes have been withheld.
Common post-tax deductions include:
- Retirement funds. Some retirement funds are post-tax, like a Roth 401(k).
- Wage garnishments. If your employee is subject to court-ordered garnishments, then those funds will be removed after their taxes have been withheld.
- Union dues, charitable donations, and contributions to 529 college savings plans.
For an example of where payroll deductions appear on paychecks, watch the video below:
Remember, you don’t have to calculate all this information on your own. Calculating a paycheck can get tricky, so it’s always best to consult a CPA or use a payroll provider to make sure everything is deducted correctly.